Personal Liability Umbrella Policies – Part 1

I received the following newsletter from Eric Heckman, CFP, ChFC.

When your local weather forecaster tells you that it’s going to rain, you reach for your umbrella. So why not purchase an umbrella that can protect you in stormy financial weather? Personal liability umbrella policies (PLUPs) can do just that. By providing liability protection above and beyond the basic coverage that homeowners/renters and auto insurance policies offer, a PLUP can protect you against the catastrophic losses that can occur if you are sued.

Although a PLUP can be purchased as a separate policy, your insurer requires that you have basic liability coverage (i.e., homeowners/renters insurance, auto insurance, or both) before you can purchase a liability umbrella policy. It is often referred to as excess coverage. If you are found to be legally responsible for injuring someone or damaging someone’s property, the umbrella policy will either pay for the part of the claim in excess of the limits of your basic liability policy or pay for certain losses that are not covered.

Why now? It’s not even raining
These days, it’s not unusual to hear of $2 million, $10 million, and even larger court judgments against individuals. If someone is injured in your home, or if you cause a serious auto accident, you could have to pay such a judgment. If you don’t have a PLUP at the time of the accident, anything above the limits of your homeowners/renters or auto insurance policy will have to come out of your pocket.

Here’s an example of how a PLUP works to protect you. Say you have an auto insurance policy with a liability limit of $100,000 per accident. You also have a $1 million umbrella liability policy. You’re later found responsible for a serious automobile accident, and the court finds you liable for $700K in damages. In this case, your auto insurance would pay the first $100K of the judgment, which would satisfy the deductible under your umbrella policy. Your umbrella policy would then cover the portion of the judgment not covered by your auto insurance ($600K).

Certain types of liability claims (e.g., libel and slander) are not covered under basic homeowners, auto, or other types of insurance policies. An endorsement can be added to these policies to provide some protection, or you can purchase a PLUP which does cover these claims.